Dan and Mary have been consistent contributors to their Registered Retirement Savings Plans for decades. They never miss payments and generally top it up towards the annual deadline when they have contribution room remaining.
Like many Canadians, their RRSPs are a significant part of their retirement plans. With both now in their mid-50s, those blueprints are really starting to take shape and includes other investments to balance their portfolio.
While they have their ducks in a row now, 20 years ago, it wasn’t the same. Dan wasn’t well educated on what was available and while he made a decent income as an electrician, whatever money was left over from paying the family’s bills was stagnant in his low interest savings account.
It wasn’t until they applied for a mortgage on their second home at their local credit union that they were introduced to John, an experienced financial advisor. John studied their financial situation and helped develop a plan that works for them. He especially stressed the value in putting a priority on RRSPs – a government registered savings account that Don and Mary have contributed to ever since. There was also the tax benefits the couple has enjoyed.
The lessons that Dan and Mary learned during their initial meetings with John have helped them today. Especially with John’s emphasis on 5 key mistakes to avoid when contributing to RRSPs:
1. Missing a contribution:
Skipping just one annual contribution of $5,000 could reduce the value of your RRSP by almost $17,000 at the end of 25 years (assuming a 5% annual rate of return). So, it’s important to contribute every year to take advantage of tax-sheltered compounding growth.
If you’re rushing to meet the deadline, it’s easy to make a bad investment choice or none at all. So make your RRSP contribution in cash. Then, later, when you’ve carefully evaluated your options, transfer your ‘parked’ money into an appropriate investment.
3. Waiting until the last minute:
Life is busy, so you may end up scrambling to contribute just before the RRSP deadline. A smarter approach is to put your savings on autopilot and have smaller pre-authorized amounts deducted from your chequing account regularly throughout the year. You’ll get the advantage of dollar cost averaging, improve your chances of maxing out your RRSP every year and get the advantage of tax-deferred compound growth working for you earlier.
4. Dipping in prematurely:
Cashing in a portion of your RRSP has significant tax consequences unless you’re doing so through the Home Buyers Plan or Lifelong Learning Program. First, between 10% and 30% of the amount withdrawn is withheld immediately and forwarded to the CRA on your behalf. Plus, your total withdrawal must be reported as income and taxed accordingly. In the end, the cash you’re left to spend may only be half of the amount initially taken out. So, cash in your RRSPs only as a last resort.
5. Thinking only cash:
If you don’t have enough cash on hand to contribute then consider moving investments from your non-registered plans to your RRSP. This ‘in-kind’ contribution can be made with various investments deemed eligible. Remember you’ll have to report any capital gains earned on your investments up to the date of the transfer.
Regardless of what stage of saving you are at, those mistakes can cost you significantly over time as you continue saving for your retirement. By talking to a financial expert now, they can help set out a plan customized to meet your needs.